Are We Out of the Woods Yet?

By Quentin Fottrell

Investors breathed a sigh of relief as U.S. markets rallied for a second consecutive day on Friday, taking heart at positive retail sales for July and shrugging off a sharp fall in consumer sentiment. But despite the rally, many market experts say we’re still a long way from pro-longed recovery and to expect more turbulence ahead. Some economists still fear the U.S. is heading inexorably toward a double-dip recession: Economist Nouriel Roubini warns that the risk of a global recession is now greater than 50% and, according to a survey by The Wall Street Journal, more economists now see U.S. entering a double-dip recession within the next year: 29% versus 17% just a month ago.

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To prepare for more trouble ahead, some investors are dumping stocks for bonds and cash. “Don’t own equities or preferred stock,” says Mark Grant, managing director at Southwest Securities in Dallas, Tx.. “Stay in the senior debt of industrial companies or U.S. Treasurys.” He believes a European debt crisis would be worse than the 2008 U.S. financial crisis. David Hefty, CEO of Hefty Wealth Partners in Auburn, Ind., has exited all equities and has no regrets — despite more bullish analysts feeling vindicated as U.S. stocks rallied Friday. He believes the U.S is in the midst of a secular bear market with 10-15 years to go. “Timing the market is impossible,” he says.

Other bears are betting on stocks overseas. Andrew Schiff, an investment consultant with brokerage firm Euro Pacific Capital in New York, says he leans towards conservative dividend-payers in countries that have strong currencies. “Why would you buy a fixed-income bond if you can buy a stock that pays a dividend?” Some of his top stock picks include Australian communications company Telstra Corp., which has a dividend yield of around 10%. He also recommends Wajax, a Canadian heavy duty equipment distributor with a dividend yield of around 6%. “The dollar been held up by a huge effort around the world,” he says. “Once those props are removed the dollar could fall precipitously. Dividend stocks are the bread and butter of our strategy,” Schiff says.’

For investors in international funds with exposure to France, in the midst of its own banking crisis, analysts advise against panic selling. French stocks account for about 14% of an average European equity fund group and 9% of a foreign large cap equity fund, according to Morningstar mutual fund manager Karin Anderson. Given those not small percentages, she says, “It’s not the time to reorganize your entire portfolio into something else.” Erin Davis, analyst with Morningstar, prefers U.S. to European financials, but she also recommends holding tight for now. “They are over-leveraged, not as well capitalized and they aren’t nearly as far through their write-downs as American banks,” she says. “But there is a lot of uncertainty priced into the stocks right now.”

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